How to Understand Cash Value Life Insurance
Cash price A type of life insurance that accrues cash value is life insurance, sometimes referred to as universal life or whole life insurance. You can utilize this cash value in a variety of ways, such as to pay premiums that are overdue, to take a part for retirement income, or to surrender the entire policy and transfer the funds to another investment.
Cash value type plans do not have an expiration date, in contrast to term life insurance. They can thus continue to apply for the rest of your life. However, certain cash value plans do include a maturity date that may force you to accept the policy’s growing cash value and revoke the death benefit.
How Do Policies With Cash Value In Life Insurance Operate?
A premium is needed for the death benefit selected by the policyholder in cash value life insurance. The insurance coverage accrues monetary value as a result of paying this premium.
Once the policy accumulates cash value, the policy owner can choose to access the cash value through an array of options. This might include exercising a nonforfeiture benefit offered by the life insurance contract. Alternatively, it could be taking some of the money out of the policy through a withdrawal or policy loan.
Using the cash value in a policy comes with little strings attached. Cash value policy owners have the option to remove money from their policies without facing limits or taxable consequences found on many retirement investment accounts. Additionally, cash value policies offer a wide array of tax-favorable benefits that attract many insurance buyers to the product.
What Fees Are Associated With Cash Value Life Insurance?
These life insurance policies are criticized by some for their costs. There are costs associated with cash value life insurance plans, some of which can be quite high.
These costs are outlined in detail for some products in a special report that goes along with the life insurance example. The prices of other goods, however, are highly elusive. Unsurprisingly, this results in criticism and dire warnings against things with a financial value. Products like universal life insurance will give you a thorough breakdown of your costs. The illustration for life insurance is accompanied by this report.
This report shows us the annual charges assessed against the policy in the column titled “Policy Charges.” This report also details the loan interest charged if a policy loan is outstanding (see years 29 and 30).
Whole life insurance, on the other hand, does not provide details on policy costs. Some people refer to whole life insurance as the “Black Box” for this reason. The product operates in relative secrecy and never discloses the actual fees the insurance company deducts from the policy.
Types Of Policies
Life insurance options for cash value-style products come in two basic forms; whole life insurance and universal life insurance. Both types of life insurance operate under the same basic principles of any life insurance policy. They both offer life insurance coverage, have a premium payment you must make for a certain length of time, and they will both pay death benefit proceeds to your named beneficiary upon death.
Additionally, both policy types provide a cash value account and they are both considered permanent life insurance policies, which will last for your entire lifetime. A whole life insurance policy will offer several guarantees. These include guaranteed premiums, guaranteed death benefit, and guaranteed accumulated cash value. A whole life policy will tend to have a much more rigid premium payment in exchange for these guarantees. Whole life policies do not have surrender charges, so the cash value of your policy will also be the cash surrender value of your policy.
Whole life policies tend to come from mutual insurance companies. These are insurance companies owned by their policyholders. Mutual insurers’ financial obligations are to these policyholders. Universal life insurance gives up most of the guarantees offered by a whole life policy to provide higher potential non-guaranteed features. A universal life policy also offers considerable flexibility of policy premiums. Surrender charges are a common feature found on universal life insurance so this means the policy’s cash value is not necessarily the cash surrender value.
There are several different types of universal life policies. They include variable universal life insurance, indexed universal life, and “current assumption” universal life. Variable life insurance puts the policy’s cash value in an investment account where it rises and falls with the performance of the investment. Indexed UL insurance pays an interest rate that tracks a stock market index. Current assumption products set an annual interest rate payable on the policy’s cash value.
How Can I Get the Cash Value?
The cash accumulation element of a cash value insurance policy is its main selling point. This kind of life insurance is popular since it may be used as a savings account. The benefit of this savings account over a typical money market or savings account is the significantly higher effective interest rate. These policies’ cash rises at a pace more in line with bonds while also offering significantly more liquidity.
The way you access the cash value in these policies does differ a bit depending on the type of cash value life insurance you own. You can access the cash value through either partial withdrawals or a loan. UL policies allow partial withdrawals of all policy values whereas whole life policies only permit partial withdrawals of non-guaranteed cash values.
Loans work similarly across both life insurance types. Both accumulate interest, which you can choose to pay out of pocket or add to the outstanding loan balance. Loans enjoy special tax advantages that prevent them from creating an income tax liability–this is true for both product types.
You can also use your whole life insurance cash value for the three nonforfeiture benefits: extended term insurance, reduce paid-up, or surrender for cash value. Universal life policies allow only the surrender for cash value nonforfeiture benefit.
What Insurance Companies Issue These Types Of Policies?
Mutual insurance companies often issue whole life policies. But whole life can also come from other forms of insurance companies. Additionally, fraternal companies often issue whole life policies. Fraternals are not technically insurance companies, but they operate under very similar protocols.
Universal life insurance policies come from a much broader mix of life insurance companies. Some mutuals do offer UL policies, but it’s more common to see this type of cash value policy from a stock life insurance company.
It’s important to understand that not all life insurers issue every type of life insurance policy. So while some companies might issue one or the other, you shouldn’t just expect that they will offer both types.
Is Buying Through An Agent Required?
If you want a cash value policy, you must get it via an agent or broker. Cash value plans are distinct from term life insurance policies, which may be purchased directly from a variety of sources without the assistance of an insurance agent.
It is exceedingly challenging to sell these insurance in an automated method, as some businesses do with a term life policy, due to their complexity. The insurance premiums you pay for the death benefit of the policy might differ significantly based on a number of variables. This contains different policy provisions and any selected riders.
In addition, cash value policies can create a tax penalty situation due to the Modified Endowment Contract (MEC) limitations imposed on them by the IRS. Having a knowledgeable life insurance agent available to help guide you through this could save you from a significant hassle.
Do I Receive Dividends?
You could receive a payout if you purchase entire life insurance. Dividend payments are not guaranteed by life insurance companies, and you must make sure your full life policy is “participating” in order to get dividends.
Policies in the UL style do not pay dividends. Instead, they make payments of variable-year interest. Or, with variable life insurance, the cash value will fluctuate in line with the performance of the investments included in the policy.
What Kind Of Return Rate Am I Going To Get?
Your cash value policy’s rate of return will be influenced by a number of variables. The life insurance premium you pay in relation to the death benefit of the policy is the main factor that affects the rate of return. In most places, your gender may not have much of an impact, although women tend to earn somewhat more money at the same age since their insurance premiums are often lower.
These life insurance plans’ returns will correspond to those of the portfolios handled by the life insurance company, also referred to as the General Account. Over the course of your lifetime, you should expect an annualized return of about 4.5 to 4.5 percent.